Argentina has finally run out of wiggle room in a billion-dollar showdown over foreign debts unpaid since the country's world-record default a decade ago, and the stakes couldn't be higher for President Cristina Fernandez.
A US federal judge in New York late Wednesday ordered Argentina to pay immediately and in full everything it owes to what Fernandez calls "vulture funds" that she blames for much of her country's troubles.
That adds up to US$1.3 billion, due by December 15.
The judge also barred Argentina from paying other bondholders until it satisfies this judgment, putting the president's back against the wall: If she doesn't reverse her long-standing position and pay up, she risks triggering another historic Argentine debt default, this time totalling more than US$20 billion.
"It is hardly an injustice to have legal rulings which, at long last, mean that Argentina must pay the debts which it owes. After 10 years of litigation, this is a just result," US District Judge Thomas Griesa concluded.
Argentine Economy Minister Hernan Lorenzino responded to the judge Thursday by pledging to battle "judicial colonialism."
Lorenzino said Argentina would defend its stance using all legal means and would take the ruling to the US 2nd Circuit Court of Appeals on Monday.
"Paying the vultures is not only unfair, but illegal following our internal rules," Lorenzino told reporters, referring to Argentina's "ley cerrojo," or "lock law," which bans the reopening of debt restructuring.
"We'll fight all decisions that are against the interests of our country," Lorenzino said, adding that Argentina is also ready to appeal to the US Supreme Court and take its case before any international body.
"We still believe the US justice system will fix this in a way that won't affect Argentina, its legitimate creditors and, in an international context where the importance of these decisions is patent ... in terms of the financial international architecture," he said.
Argentina's president had insisted earlier this week that her administration wouldn't pay a single dollar to the plaintiffs.
No room for evasion
But the judge gave Fernandez no room to manoeuvre meanwhile, lifting his stay and ordering that the money be put in an escrow account for the plaintiffs to collect.
"These threats of defiance cannot go by unheeded," the judge wrote. "The less time Argentina is given to devise means for evasion, the more assurance there is against such evasion."
If Fernandez refuses, the judge said that the Bank of New York, which processes Argentina's bond payments, will find itself in violation if it doesn't hold up payments to all other bondholders.
"It's a mess. This does not help Argentina. Default could happen," Goldman Sachs analyst Alberto Ramos in New York said Thursday. "The markets will react negatively to this."
The remedy also sent jitters through the legal departments of the most powerful financial institutions in the United States.
The US Federal Reserve and the Clearing House, a trade group representing the world's largest commercial banks, told the judge to make sure his order won't affect the US funds-transfer system, which automatically moves an average of US$2.6 trillion a day in a half-million transfers between more than 7,000 banks.
The entire system depends on transfers being "immediate, final and irrevocable" when processed. Requiring intermediaries to identify, stop and divert payments according to court orders "would impede the use of rapid electronic funds transfers in commerce by causing delays and driving up costs."
The judge dismissed these concerns Wednesday night, saying among other things that "if Argentina complies with the rulings of the Court of Appeals, there will be no problem."
As with so many other things involving Argentina, this case is rooted in the bloody dictatorship that ruled in 1976-1983.
The military junta more than tripled the country's foreign debts. By 2001, the burden had become unsustainable and the economy collapsed.
Argentina's US$95 billion default still stands as a world record.
Sovereign debt is supposed to be paid no matter who runs a country, but Fernandez has always considered this defaulted debt to be illegitimate, forced onto the Argentines by dictators acting in concert with international financial speculators.
She and her late husband and predecessor as president, Nestor Kirchner, who took office in 2003, have never made any payments on the defaulted bonds.
Instead, they offered new bonds paying less than 30 cents for each dollar owed in default, and by 2010, some 93 per cent of the original bondholders agreed to the swaps.
The debt relief granted by these "exchange bondholders" enabled Argentina to climb out of a deep economic crisis, and many analysts have described it as a model for Greece and other debt-burdened countries to consider.
Holdouts led by NML Capital Ltd, an investment fund owned by US billionaire Paul Singer, refused the swaps, insisting on payment in full plus interest.
Singer's lawyers have travelled the world since then seeking to embargo Argentine assets, even getting its naval training ship Libertad seized in Ghana as collateral. But they have never collected.
The judge's solution to all this is to force Argentina to pay the holdouts an equal amount each time it makes a payment to the exchange bondholders.
And since the latter group is due to get US$3.3 billion on December 15, the judge said the holdouts must get their entire US$1.3 billion by then as well.
Exchange bondholders who collectively own US$20 billion in the restructured Argentine debt had argued that they "already suffered tens of billions of dollars in losses" and that it was not fair to harm their already diminished returns so that a few holdouts can earn up to 200 per cent on debt they bought for pennies on the dollar after Argentina's collapse.
If allowed to stand, this kind of remedy will make it impossible for other countries to get critical debt relief, they argued.
But the judge said his remedy was fair.
"The exchange bondholders bargained for certainty and the avoidance of the burden and risk of litigating," while the holdouts spent years unsuccessfully trying to make Argentina pay, he wrote.